This is the first Budget since 1992 to provide a reduction in the personal sector's taxation. Although the economy has shown continuous expansion since that time, there is now clear evidence that the growth rate is falling. For the majority of institutional property investments, which require a degree of rental value growth to justify their retention at current prices, the most important issue is economic growth. As about three-quarters of GDP growth is attributable to consumer expenditure, its growth is critical; almost inevitably, this will be stimulated to rise as a result of this Budget.

Not surprisingly, interest rates were not addressed in the Budget speech. Nevertheless, there is a relationship between the amount of tax cuts and the amount by which interest rates can be reduced; both are capable of generating increased inflation and there is effectively a trade-off between the two. The Bank of England is still looking for a rise, although the chancellor had persuaded the governor that a decision can be deferred. In the meantime, the consensus of economists' opinions has been moving strongly towards a reduction. The moderate level of the tax cuts, £3.14bn will provide further support for such action.

Depending on the quantum, lower interest rates are, in principle, more attractive to the property market than cuts in taxation. Whilst both can be a stimulus to economic growth, the former is also a significant factor in investment and housing sentiment but, more importantly, directly drives demand for higher-yielding investment properties.

Inflation

The measures announced by the chancellor could translate into a potent growth injection for the economy. By funding tax cuts from the contingency reserve, rather than net cuts in departmental spending, the budget is likely to be more inflationary than many commentators were expecting, particularly as the majority of the giveaway has been targeted to the personal sector. The chancellor's optimism on inflation could be supported by slowing economic growth, recent good news on inflation and the effect of the National Grid sale. However, it is clear that the cuts in taxation will increase consumer's disposable income and that this is likely to have a positive effect on consumption and may marginally increase inflationary pressure. When 1996's windfall gains from corporate activity (share-buy-backs, special dividends and merger activity) and the maturing of TESSAs are taken into consideration, this could translate into a rather awkward jump in inflation in the pre-election period.

However, in practice the full increase in disposable income is unlikely to be felt in the high street. The measures to stimulate savings and investment are likely to siphon off some of the gain, as is debt repayment. Therefore, in practice the net inflationary effect is unlikely to push retail price inflation beyond the targets set out by the chancellor for the end of the current parliament. Although there is likely to be an increase in inflationary pressure, we remain confident that the relatively conservative stance taken by the chancellor will not lead to a significant change to the UK inflation outlook.

Rating

In last year's Budget, the Chancellor of the Exchequer increased the rate in the pound to 43.2 pence, an increase of 2.1% which was roughly in line with inflation. At the same time, the rating revaluation was introduced which significantly changed businesses' individual liabilities. The rise in the rates burden was limited by setting maximum increases, in real terms, of 7.5% for small businesses and 10% for large businesses for each year. These limits have now been reduced to 5% and 7.5% respectively. The corresponding limits for phasing rate reductions are unchanged.

By virtue of the phasing arrangements, some properties will not reach their full rateable value even in five years' time. An analysis of the 902 locations held in the Hillier Parker Rent Database has shown that as a result of these changes, a further 33 locations (in addition to the previous 92 locations prior to the recent amendments) will fall into this category. The additional office locations are characterised by being of secondary nature, with retail locations exhibiting characteristics of being small, remote towns whose rental values during the boom times was less than £40 Zone A.

Economy and the Property Market

This Budget has mainly been designed to stimulate the consumer sector. The cuts in personal taxation coupled with other minor measures are likely to leave the personal sector around £2.5bn better off in the next financial year. If entirely translated into consumers' expenditure, this would represent an increase of approximately 0.7% on our October forecast. The chancellor also introduced measures to make savings more attractive. A reduction in the tax rate on savings income from 25% to 20% (for basic rate tax payers) and changes in employee share schemes and the save-as-you-earn (SAYE) scheme are designed to channel some of the increased wealth from expenditure into personal savings.

Measures have also been introduced to stimulate the small business sector. A cut of 1% in the small business rate of corporation tax and changes in employers' national insurance contributions (reductions in the main rate and the Class 4 rate to 10% and 6% respectively and an extension of the rebate for employing the long-term unemployed) should boost job creation and profitability in this sector. This, coupled with the increase in savings, should bode well for investment.

These increases in consumption and savings are likely to increase GDP by about half a percentage point next year, which may explain the chancellor's expectation of higher growth next year than this year (a reversal of his 1994 Budget predictions).

The total revenue giveaway in the next financial year is estimated to be £3.14bn over and above what would accrue solely due to indexation. The chancellor has, meanwhile, secured a balanced government expenditure Budget - in other words, spending increases in some departments (notably health, education, social security and local government) exactly balance out spending cuts in others (mainly defence, housing and employment). However, he has cut £3.2bn from the contingency reserve - a sum of money which is set aside in case spending exceeds expectations. Hence, planned government expenditure has not changed and the giveaway represents a real and substantial injection into the economy.

This injection is likely to have a positive effect on property. The increase in consumer spending should benefit the retail sector - though it should be noted that not all of the increase in spending will accrue to retail sales - spending on housing, services and debt repayment is also likely to rise. Nevertheless, retail sales should receive a welcome boost. This is likely to lead to an increase in demand for space and hence, lead to an increase in retail rental values. The increased investment resulting from savings and businesses, combined with increased production to account for the increased demand from consumers, is likely to lead to an improvement in rental values in the office and industrial sectors, though this improvement will lag that of the retail sector.

Private Finance Initiative

Arguably, the Private Finance Initiative has been the centrepiece of the Government's financial policies in the post-privatisation era. Introduced in November 1992, it is only now starting to have a significant impact. Nevertheless, progress has been slower than expected by the chancellor - in April, he confidently announced that the Government was on track to contract some £5bn this financial year; he is now suggesting that the figure is likely to be only £2bn.

The essence of the scheme is to tap private sector capital and expertise for public sector projects. There are two advantages for the Government - one actual and one claimed. The certainty is that any private sector finance for projects will lead to a corresponding reduction in government spending - at least in the short-term. This is, however, the public sector's equivalent to off-balance-sheet finance. The inevitable down-side is that the future revenue costs from the projects will raise the PSBR - but will be spread over a longer time-frame and will therefore affect future government spending.

Four particular projects were mentioned in the Budget statement: they were 25 road projects totalling £500m, a £35m project to modernise two hospitals, £50m to add two new prisons and £45m for a water treatment scheme in Inverness.

The claimed advantage is that the private sector will be more efficient and more innovative. It will, however, also have to carry more of the risks and its costs of capital will be higher than for the government - it is thus still unclear as to whether the system will ultimately provide savings. Nevertheless, the chancellor's announcements proposing a target of £14bn for the period up to and including 1998/1999 are a clear indication of the Government's commitment to the scheme.

A Private Finance Panel has been established which will identify an illustrative list of over 1000 projects, worth over 25bn, that could be available for potential partnerships between the public and private sectors.

Roads Programme

The Department of Transport continues to emphasise that, with restrictions on Government spending, the roads programme is constantly under review. As a part of this, the M62 relief road north of Manchester, and proposals for widening motorways beyond four lanes, other than substituting for the abandoned link roads on the M25, will be removed from the programme. Some schemes are being reviewed to consider whether they could be replaced with more modest improvements, including proposals for improving the M4 between the M25 and Maidenhead, and the A1 Gateshead western bypass.

Interestingly, the emphasis was on less public money being available for trunk roads as a whole, implying that at least part of the deficit might be made up from the Private Finance Initiative, which is now starting to form a significant part of the roads programme.

A new schedule of road proposals has been produced to replace "Trunk road in England 1994 Review".

Personal Sector

                         --------- Tax Year ----------  
                         1995/6                 1996/7
Low Band                 £3,200 @ 20%           £3,900 @ 20%
Basic                    £24,300 @ 25%          £25,500 @ 24%
Higher                   remainder @ 40%        remainder @ 40%
Personal Allowance       £3,525 @               £3,765 @ 
                         highest marginal rate  highest marginal rate
Married Couple's         £1,720  @ 20% tax rate £1,790 @ 20% tax rate
    Allowance
MIRAS, interest on       £30,000 @ 20%          Unchanged to end of
                                                term
Inheritance tax 
    threshold            £154,000               £200,000


Indirect Taxation  
                           ----------- Tax Year -------------  
                           1995/6                      1996/7
Beer (pint)                Unchanged  
Wine                       Unchanged  
Spirits                    Down 4%, 27p on a 
                             bottle of whisky  
Strong Cider (pint)        Up 8p   
Cigarettes                 Up 15p on a 
                             packet of 20
Cigars                     6p per packet  
Pipe Tobacco               8p per packet  
Leaded Petrol              Up 3.5p per litre  
Super Unleaded Petrol      Up 3.5p per litre           Up a further
                                                       4p per
                                                       litre as of
                                                       May 
Diesel                     Up 3.5p per litre  
Road Fuel Gases            Cut by 15%
Land Fill Tax              £7 per tonne - standard     £2 per tonne
                                                       - inert
Road Tax                   £135                        £140    
-cars over 25 years old    £135                        Exempt


Corporate Sector
                           ------------ Tax Year -----------
                                  1995/6                 1996/7
Corp Tax small                    25%                    24%
VAT Registration 
De-registration                   £46,000                £47,000
                                  £44,000                £45,000
CGT Thresholds          
 - Individuals                    £6,000                 £6,300
 - Trustees                       £3,000                 £3,150
 - Retirement Relief              Age 55                 Age 50
Uniform Business Rate 
 - Small properties               7.5%                   5%
 - Large properties               10%                    7.5%
NIC - Employers' Contribution     10.2% @                10% @ 
                                  maximum                maximum 
                                  level                  level


Savings and Investment
                               ------- Tax Year -----  
                                 1995/6                     1996/7
Bank/Building Society Interest 
    (basic rates payers)         Taxed at 25%            Taxed at 20%
Share Option Schemes             
  Tax Relief                     Reinstated for Options 
                                 worth up to £20,000
Sickness & Redundancy 
Insurance Benefits               Taxed at marginal rate      Exempt


PSBR Targets
1995/6            £29bn
1996/7            £22.5bn
1997/8            £15bn
By end of decade  0


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